Glossary · Investing and personal finance
Portfolio
A portfolio is the whole collection of investments someone owns, such as stocks, bonds, funds and cash, looked at together rather than one by one.
Also called: investment portfolio, holdings
A year: 60% US stocks, 40% 10-year Treasuries, reset every January.
In plain words
An artist’s portfolio is a folder of their best work. An investor’s portfolio is everything they have invested: shares, bonds, funds, cash, maybe gold or a rental flat. What matters is how all of it behaves together.
A portfolio is judged as a whole because its parts can cancel out. An investment that zigzags wildly can make a portfolio calmer if it tends to rise when the others fall. That is the idea of diversification.
Building one comes down to a few choices: which kinds of assets and how much of each (asset allocation), which funds or securities to hold them in, and how often to put the mix back in shape (rebalancing). Our portfolio builder lets you try any mix of 23 assets, month by month.
Example
Reading a small portfolio
- You own a stock index fund worth $12,000, a bond fund worth $6,000 and $2,000 in a savings account. Total: $20,000.
- The weights: stocks $12,000 ÷ $20,000 = 60%, bonds 30%, cash 10%.
- Next year the stock fund gains 10% ($1,200), the bond fund 3% ($180) and the savings 4% ($80): +$1,460 in all.
- Portfolio return: $1,460 ÷ $20,000 = 7.3%.
A portfolio’s return is each part’s return times its weight, added up: 0.6 × 10% + 0.3 × 3% + 0.1 × 4% = 7.3%.
One level deeper
Modern portfolio theory, introduced by Harry Markowitz in 1952, judges a portfolio by two numbers: its expected return and its risk (volatility). For each level of risk there is a best possible mix, and the line of these best mixes is called the efficient frontier. Markowitz shared the 1990 Nobel prize in economics for the idea.
In practice, many portfolios are built from a handful of broad index funds: one for home-country stocks, one for foreign stocks, one for bonds. A model portfolio is a fixed recipe, such as the 60/40 portfolio or the “permanent portfolio” of a quarter each in stocks, long bonds, gold and cash.
The return you actually get is the portfolio’s, minus fees and taxes, and minus the cost of your own decisions: buying after rises and selling after falls can cost more than any fee.
Why it matters
Looking at the whole portfolio, not each piece, stops one bad investment from looking like a disaster and one lucky one from looking like genius.
Risk and return belong to the portfolio: the same asset can make one portfolio riskier and another one calmer.
It is how professionals and pension funds are measured: the whole, against a benchmark.
A common mistake
Myth: In a good portfolio every investment is doing well.
In fact: A well-diversified portfolio almost always has something doing badly. If everything in it rises together, everything will also fall together.
Questions people ask
What is usually in a portfolio?
Most hold a mix of stocks and bonds, often through funds, plus some cash. Some add property, gold or other assets. How much of each is the asset allocation.
How do you calculate a portfolio’s return?
Add up each holding’s gain or loss and divide by the starting total. Or multiply each holding’s return by its share of the portfolio and add the results: 60% in something that gained 10% and 40% in something that lost 5% gives 0.6 × 10% + 0.4 × (−5%) = 4%.
What is a model portfolio?
A fixed recipe of assets, held and rebalanced on a schedule. Our model portfolios page follows stock/bond mixes from all stocks to all bonds since 1871. A 60/40 mix of US stocks and 10-year Treasuries returned 5.6% a year after inflation since 1871.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US 10-year Treasury bonds, total return index: Robert J. Shiller, Online Data (shillerdata.com), ie_data.xls, sheet "Data": "Long Interest Rate GS10", checked against "Monthly Total Bond Returns" and "Real Total Bond Returns".
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- This page explains a term. It is not investment advice.